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Millennial Day Traders Could Cause the Next 2020 Market Crash

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The COVID-19 market crash that saw stock markets take a nosedive. The markets have begun to rally since the swift decline. At writing, the S&P/TSX Composite Index has recovered 37.56% from its March 2020 bottom. Amid all this, there is growing evidence that day traders managed to get the better out of timing the bottom than several hedge funds.

Major financial institutions like Goldman Sachs have published reports that highlight retail investors having timed the market bottom better than hedge funds. And one thing everybody is talking about amid the changing dynamics is Robinhood.

The millennial Robinhood

Among the most prominent reasons for day traders timing the COVID-19 market bottom was the Robinhood Financial trading app, a low-cost trading app with a demographic that primarily consists of a millennial user base. The report indicates that users of the app, i.e., millennials, constituted the number of day traders who invested in outperforming stocks.

However, millennial investors flocking to Robinhood and how much they are influencing the market is sparking controversy. Q2 2020 has seen several inexplicable rallies that led to day traders getting the better of hedge funds. The +800% rally for Hertz, a bankrupt company, is a prime example of the absurdity of the market situation.

Why the stocks are soaring

Robinhood stocks may be rallying primarily because of the sheer number of day traders purchasing shares through the platform. Three million new users signed up to the platform in Q1 2020, along with similar figures for other low-cost trading platforms. If millions of traders move into the market for the first time in Q1, a substantial market movement is possible.

Worries of another crash

Platforms like Robinhood, while making stock market trading more accessible, also set a dangerous precedent. The pandemic era equity markets are full of speculation with no visible end to the global health crisis. A brokerage with such frenzied following empowering novice investors could set things up for another disaster.

Most millennials dabbling with the app are not likely to be finance-savvy. Half of the new users on this platform are first-time investors who may not know what they are doing. Like Hertz, many stocks that soared on the platform were either bankrupt, close to bankruptcy or suffering from other financial issues.

Among the stocks making it big when its fundamentals do not dictate such a rally is Aurora Cannabis Inc. (TSX:ACB)(NYSE:ACB). Between May 13 and 21, its share prices rallied by almost 200%, like many other Robinhood stocks. It is among the most popular assets trading on the low-cost platform.

Similar to several other stocks making it big on the platform, Aurora is riddled with problems. The company continues to lose money. It reported a $137 million net loss in its latest quarter and took on $760 million in impairment charges. The company might be in for billions more moving forward.

The post-legalization boom of marijuana stocks has died, yet the company soared because millennial investors allegedly chose to place their faith in the stock. While it might have rallied, Aurora’s fundamentals will eventually have the final say.

A bankrupt stock gained more than 800%, and Aurora went up almost twice its price. Calling the stocks overvalued would be an understatement. When prices correct themselves, it could catalyze the next major market crash.

Foolish takeaway

Aurora has begun to slide again, aligning with its long-term trends. It seems like the rally might be over for now. Still, the sudden surge shows exceptionally challenging circumstances the stock markets can face.

I would advise doubling up on defensive assets and removing any positions you may have in problematic stocks like Aurora.

Speaking of defensive assets…

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Fool contributor Adam Othman has no position in any of the stocks mentioned.

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